FTEC Offers Broader Tech Exposure Than XLK, But There's a Hidden Downside

The State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) and the Fidelity MSCI Information Technology Index ETF (NYSEMKT:FTEC) both target the U.S. technology sector, but they take slightly different approaches. XLK tracks a narrower slice of the S&P 500, while FTEC tracks a broader MSCI index covering more companies.

This comparison examines cost, performance, risk, portfolio composition, and other features to help investors determine which approach may appeal more.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500. The 1-yr return represents total return over the trailing 12 months.

Both ETFs are equally affordable with a 0.08% expense ratio, but XLK offers a slightly higher dividend yield. The most notable difference in cost-related factors is scale: XLK’s assets under management (AUM) is more than five times larger than FTEC’s.

Performance & risk comparison

What's inside

FTEC tracks the MSCI USA IMI Information Technology 25/50 Index, holding 289 stocks from various corners of the technology sector. Its top three positions — Nvidia, Microsoft, and Apple — make up more than 44% of assets, but the remaining holdings provide broader exposure across the sector.

XLK also targets technology, but with only 70 holdings. Its largest holdings match FTEC’s, but those three stocks make up just under 40% of the fund. Both ETFs carry no notable structural quirks and track major technology benchmarks.

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What this means for investors

XLK and FTEC are similar in many ways, both focusing on the tech sector with heavy tilts toward industry-leading giants. The two funds have identical expense ratios, though XLK has a slight edge in income with a higher dividend yield.

While they have similar performance histories and risk profiles, FTEC has a slightly higher beta and a deeper max drawdown — suggesting marginally larger price swings over the last five years.

Diversification is one of the primary differences between them. FTEC is the broader of the two, with over four times as many holdings as XLK. However, it also has a slightly heavier tilt toward its top three holdings, with those stocks comprising 44% of the portfolio compared to 39% for XLK.

That may not seem like a major difference, but if Nvidia, Microsoft, or Apple performs particularly well or experiences significant volatility, it could widen the gap in total returns between these two funds.

The other major difference is AUM. XLK is substantially larger in this area, and greater liquidity allows investors to make larger transactions without causing the fund’s price to swing. This may not necessarily be a deciding factor for everyday investors, but it’s something to consider when many of these ETFs’ other attributes are so similar.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.